Not So Quickly Everybody | Daily Market Commentary with Jeffrey Halley
The legions of Optimism-20 virologists and epidemiologists were out in force overnight on Wall Street. After much academic debate based on their years of experience in the field, they came to the scientific conclusion that Covid-19 infections were peaking and then proceeded to buy everything. Equities hit new highs, and oil staged a mighty rally, as everyone tried to get on board the last FOMO train to V-Shaped Station Central in the Recovery District.
Asia, having enjoyed the spoils of that sentiment yesterday, would logically have hitched their wagons to the train this morning. However, China had other ideas and has poured a sizeable cold bucket of reality onto investors one-way trip to alpha nirvana. China announced a change in the “methodology” by which Covid-19 infections are reported. That has resulted in a 10-fold jump of 14,840 cases this morning and a tragic rise in the number of reported deaths.
The China announcement has shaken Asia’s confidence this morning with the equity FOMO train leaving the station with many empty seats. That may well be no bad thing given they were faced with choosing between ignoring advice the World Health Organisation, Australia’s Chief Medical Officer and Imperial College London for example, all of whom are saying peak-virus is premature. Or assimilating into the Borg-like hive-mind of Wall Street, with its assembled group-think collective of “experts.”
In the real world, the fall-out from Covid-19 continues to make its presence felt. This week’s Singapore Airshow is a ghost town. The Mobile World Congress in Barcelona has been cancelled, and the China Formula One Grand Prix postponed. Even the Hong Kong Seven’s rugby tournament looks set to be delayed today from April to August. Pleas from rugby players such as myself that Covid-19 cannot survive in a rugby supporters blood, due to beer-induced PH changes, will sadly, fall on deaf ears.
Brazilian Retail Sales and European Industrial Production disappointed overnight, reminding us that ex-USA, all was not well with the world. India’s Inflation rose to 7.59% while Industrial Production fell by 1.20%, reinforcing the stagflationary corner that India finds itself in 2020. In case reader’s are not familiar with stagflation, it is a dark corner of economics that economists are frightened to mention by name, much like Voldemort from Harry Potter. Take rising prices and falling growth, mix them together into one potion and prepare to feel ill.
Worryingly all of the above data, into which you could throw Singapore Retail Sales and Malaysian GDP yesterday, was from December. I.e. before Covid-19 was even a sparkle in a bat’s eye. Reinforcing this point, Greek Government 10-year debt now yields sub 1.0%, joining that other bastion of fiscal piety, Italy. A US 10-year bond yields around 1.60%. The prosecution rests.
That said, I shall not be the least bit surprised if Wall Street ignores my assembled wisdom above again tonight. As long as Covid-19 remains confined mostly to China and distant places like Singapore, the FOMO-trend is your friend, the logic goes.
On a final note, #thevoiceofreason celebrates his birthday tomorrow. Regular service returns on Monday.
Wall Street enjoyed yet another impressive rally overnight as Wall Street took yesterdays slowing of new Covid-19 cases as a sign that the worst was over. Expectations of a V-shaped recovery saw the S&P 500 rise 0.65%, the Nasdaq rose 0.90%, and the Dow Jones climb 0.94%.
That sentiment would have flowed straight into Asia this morning had the Chinese not announced a changed infection methodology and a massive jump in Covid-19 cases as a result. The argument that it was a one-off adjustment versus the integrity of China’s data collection has left Asian stock markets in somewhat of a limbo.
The Nikkei 225 is up 0.15% while both the Shanghai Composite and CSI 300 are down 0.15%. Across the region, Hong Kong, Singapore, Jakarta and Sydney indices are all flat for the session. Only the Korean Kospi is showing any signs of life, rising 0.60%.
Asia will most likely trade sideways for the remainder of the day although I suspect Wall Street will ignore the Chinese announcement this morning as a one-off spike.
Currency markets remained in a holding pattern overnight except for the EUR/USD. Weak Industrial Production data saw the Euro fall to two-year lows against the US Dollar to 1.0870. Having given up 1.0900, this becomes initial resistance. With both Italian and Greek 10-year yields now below 1.0% and Sweden’s Riksbank holding rates at 0.0% yesterday, it is becoming increasingly difficult to find reasons to hold the single currency. Mix in trade negotiations with Britain and the economic fall-out from a China slowdown and the picture doesn’t get any better. From a technical perspective, a weekly close below 1.0870 this week, implies we are on the cusp of a multi-week move lower to the 1.0500 regions.
Elsewhere both the Australian and New Zealand Dollars enjoyed rallies against the US Dollar overnight on China recovery plays. The increase in Covid-19 cases reported this morning, has sapped that bullishness. Both Antipodeans fell to mid-range at 0.6720 and 0.6450 respectively.
Regional currency markets remain moribund today, being almost unchanged against the US Dollar this morning.
The Oscar for market disconnect of the year for 2020 may well go to oil markets overnight following their aggressive rally in New York trading. Traders seized on an, at the time, apparent fall in the rate of Covid-19 infection to leap upon the V-shaped recovery express. Brent crude rose nearly 4.0% to $56.00 a barrel and WTI rose 3.10% to $51.50 a barrel.
I say disconnect because oil markets completely ignored a blow-out rise in official US Crude Inventories to 7.0 million barrels, twice the number expected. Brent Crude futures remain in contango, albeit at a gentler slope, which implies that supplies remain abundant and buyers thin on the ground.
Both contracts have risen by 15 cents in Asia this morning. Most likely the result on some disbelieving short-covering after last nights price action. I love the quote that “the markets can remain irrational longer than you can stay solvent.” Last night’s rally being a case in point. However, when markets ignore fundamentals so blatantly, it is a cause for concern. Investors should tread very very cautiously if they are thinking of jumping onto the recovery train at this station.
Gold remains the Afghanistan of the global financial markets, the forgotten war. Gold eased slightly to $1566.00 an ounce overnight having dropped to $1561.00 an ounce at one stage with the FOMO-recovery rally in full flight.
The China news this morning has seen the yellow metal regain a little mojo, rising to $1571.00 an ounce as nervous haven buyers returned to the market.
Overall though, gold continues to be a forgotten corner of the market, stuck in the mid-range between its long-term technical support at $1550.00 an ounce, and critical resistance at $1590.00 an ounce. Until one of those levels is convincingly broken, gold looks set to remain becalmed as eyes are turned elsewhere.